Neil asked,
“Do you think we are in a bubble again or is this sustainable?”
If we describe a “bubble” as a market that has been artificially induced in an unsustainable way, then we’re not in a bubble.
Let’s divide market conditions into four stages:
1. Frenzy – Prices rising, sustainable.
2. Bubble – Prices rising, unsustainable.
3. Bubble Burst – Prices dropping.
4. Bottom – Buyers gaining confidence.
The Fed’s policy of spending billions to keep mortgage rates low was what renewed confidence with buyers, and caused the market to heat up last year. If they stopped today and rates rose into the 4% to 5% range, we’d still be selling homes – though the price increases would probably flatten out.
Prices are racing skyward, but look at the breakdown of financing used to purchase detached-homes in SD County last month:
| March 2013 | #Sales | Avg.$/sf | SP:LP |
| FHA/VA | |||
| Cash | |||
| Other | |||
| Totals |
We can probably feel confident about not being in a bubble when there are more cash sales than FHA/VA – which are the only loans exotic enough to cause a bubble.
The majority of today’s buyers are long-termers – they plan to stay a while. Because they have to qualify to get the mortgage, and are using healthy down payments in most cases, they have a better chance of making it through any future hard times.
There are two notable lessons from the last downturn:
1. People who are underwater are willing to stick it out.
2. The government will save you (after they save the banks).
It is today’s frenzy that is causing people to throw the “bubble” word around. But as long as we have low inventory, solid credit standards, and buyers buying for the right reasons, then I think this market is sustainable. Higher rates (under 5%) won’t change it much either.
Check back in five years and we’ll see if there is an aging-boomer liquidation that causes some disruption, but I think it will be orderly.
Case-Shiller home prices have slightly more than doubled from 20 years ago, both nationally and in San Diego.
That’s nowhere near keeping up with gold or gasoline or other hard assets.
Much lower interest rates and mortgage payments compensate for the fact that median incomes haven’t kept up with home prices.
Agreed – Bernanke couldn’t create any jobs, so he did the next best thing. He brought payments down instead.
Just call it what it is…a feedy frenzy at the bottom. Go Piranahs!
Dear God,
Please make another real estate bubble. Just like 2005. Maybe a little higher. I promise not to blow the profits this time.
Signed,
GameAgent
The bubble isn’t in housing, but when the bubble bursts it could effect housing prices. In 2007 the bubble wasn’t really in stocks. Stocks were somewhat overvalued but not like 2000. Yet stocks got hammered when the housing bubble burst. There’s bubble forming somewhere, that’s all the fed been good at doing for the past 20 years. Most likely the bubble is somewhere in debt and when the over leveraged players are forced to liquidate all leveraged assets will fall in value to some degree.
Could NCC real estate be mostly immune from the next bubble pop? It’s certainly possible, maybe even likely. It’s a relatively small highly desirable area for people with money.
Calling the housing rebound we’ve seen a bubble is silly, just plain silly. On the other hand, arguing the rebound is solely because of Gov’t. intervention is certainly reasonable.
Bubble? Not directly, no. Unsustainable? Definitely.
Once the bubble that is government debt bursts then everything will be in the blast zone, and given the leverage inherent in real estate it’ll be hit harder than most.
Stocking up on your tinfoil?
Sellers have to be willing to sell for a real estate bubble to burst. If they are locked in at 3.5% fixed-rate mortgages and slip underwater, i think they will ride it out, in spite of the blast zone.
Yeah, that’s assuming the blast zone didn’t wipe out their jobs/careers. With Defense being on the chopping block as it is, I could very easily see large losses there. What’s the largest market sector for northern SD anyway? Defense? Health care?
Tin-foil hats aside, as a 1st time buyer in this market I find myself turned off. I’m not really looking to make one of the largest purchases I’ll ever make in my life, in an environment where sellers receive 10+ offers before the home even hits the market. Why not just wait it out for 5-10 years? Let demand die a little. Right now it seems like the supply is low, and the demand is high. Won’t this equal out in due time?
Great blog by the way. Just now running across it.
Bit more complicated then that.
Someday when we actually get together maybe I’ll give you the full macro spiel. The journey’s been full of surprises, but the destination hasn’t changed at all. For now… enjoy the ride.
there’s a bubble if you aren’t making any money. Let the good times roll!!!
@Science Guy
There is so much cash sloshing around that a big drop in prices within the next 5 – 10 yrs is very unlikely. Super low rates coupled with large downpayments (>30%) will make it relatively easy for people to ride out job loss or income disruption. The huge run up in prices in mid 2000 and the subsequent downfall shortly afterwards was primarily driven by the fact that the majority of buyers had no skin in the game (100% financing). Thus they just walked away or were rewarded with free rent.
Wait, WHAT!?!?! Did I basically say….”it’s different this time.”